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China, American Style

February 21, 2012

Weekly Market Commentary 2-21-12

Tim Phillips, CEO – Phillips and Company

There has been a lot of talk about a slowdown in the Chinese economy. A slowdown which could have possible broad based implications as China is the third largest global economy (behind the European Union and United States).

Although, before we get deeper into what those implications might be, let’s look at some recent data from January on China:

Exports and imports fell for the first time in two years.

New lending was the lowest for that month in five years.

Money supply grew the least in more than a decade.

Even with this data, China’s GDP is still projected to grow at 8.50% this year. That number is staggering compared to the United States’ expected GDP growth rate of merely 2.20%. In fact, if both China and the United States continue to grow at their expected rates and maintain that as a constant growth rate over the next several years, China will surpass the U.S. in GDP by 2024.

Here’s the, “Ripley’s Believe It or Not” part: some Chinese economists have expressed that if China’s economy does grow by less than 8%, it would be consider a recession by the Chinese! They believe China needs to maintain an 8% growth rate to stay on course with current social pressures created by new entrants coming into the workforce and people migrating towards more urban areas for jobs.

Economists also suggest there could be dire consequences if China does experience an actual recession. Yesterday, in response to the soft economic data from January the Peoples Bank of China (PBoC) cut their banks’ reserve requirement ratio (RRR) by 50 basis points. The PBoC hopes this cut will spur additional borrowing and growth. The Central Bank first cut the RRR at the end of November and utilized additional open market operations in January to provide short-term cash for banks.

Xi Jinpeng, China’s soon to be leader, suggested there would be no hard landing for China. Based on recent actions, it seems China is taking a page from the American playbook on loose monetary policy.

Going forward, if you believe the “American style” monetary policy will cause the Chinese consumer to borrow, then China might still be a good bet and could continue to rally. Although, if you think China is a society in structural change and the Chinese will not consume, then it would be wise to underweight China in your holdings. Also, if you do believe the latter then you might want to take it a step further and hedge against possible global deflationary concerns too.

The good news is the American consumer seems poised to pick up some of the slack (keyword: “some”). With the American consumer continuing to deleverage, it is unsure how much slack in consumption we could actually pick up. Let's just hope the Chinese are more responsive to the “American style” monetary policy than we’ve been.

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